Economy boost sparks rate fears

THE UK economy is growing faster than the City expected, new figures revealed today. Not only did growth gather pace towards the end of 2004, but the expansion of 3.1% for the full-year was the highest since 2000.

The numbers are likely to add weight to calls from some economists for a further rise in interest rates.

The Office for National Statistics said the British economy grew by 0.7% in the fourth quarter compared with 0.5% in the July to September period and above the 0.6% quarterly growth that the City had expected. That took the annual rate of growth to 2.8% compared with 3.2% in the third quarter.

Economic strength was driven largely by the services sector. The manufacturing sector slipped into a technical recession.

For the full year, the ONS estimated that the economy grew by 3.1%, roughly in line with the Bank of England and Treasury's forecasts, marking the fastest rate of growth since 2000. It was also well ahead of the 2.2% recorded in 2003.

While the services sector, which accounts for around 72% of the whole economy, grew 1% on the quarter, the output of the production industries contracted 0.5%, the second quarterly fall in a row.

While many economists would call this a technical recession, the ONS said it would not comment on the definitions and whether the manufacturing recovery was over. The driving force for economic came from business services and finance, up 1.5% in the fourth quarter, and transport and communication, ahead by 1.4%. High Street sales only posted a 0.4% increase.

The figures will fire the debate on interest rates. The Bank's monetary policy committee has raised the UK base rate from a low of 3.5% in 2003 to 4.75%. It has been on hold since August last year.

{2}Some economists have suggested that flagging spending on the High Street and signs of a property slowdown warrant a cut in rates within the next few months. However, inflation has gathered pace recently and, as today's figures show, so has economic growth. These have increased the pressure on the MPC to raise rates.

However, minutes released today from the MPC's meeting two weeks ago, when rates were kept on hold, showed the decision was clear cut with the nine members voting unanimously.

The notes showed members did not mention rate rises or cuts, saying that there had been little news over the month. The MPC saw no clear evidence of a significant change in the pace of consumption growth but noted that house price indicators had been a little stronger than expected that inflation 'had picked up a little more rapidly than expected'.

'Not surprisingly, the combination of the more balanced conclusions of the MPC allied to the stronger GDP number helped push interest rate expectations a little higher along the curve,' said Simon Rubinsohn, chief economist at broker Gerrard.

'The suggestion from the money markets is that the next move is now more likely to be up rather than in a downward direction. This is consistent with our own thinking.'